1

ing for a better price. Selling cattle at the local auction

is an example of this alternative.
The major costs of marketing at an auction are
commission and yardage. Lesser deductions may be
made for such items as insurance, feed, state inspec-
tion, state fees, National Livestock and Meat Board
checkoff, and brand inspection. A considerable varia-
tion exists nationally among auctions in the determi-
nation of commission charges. Some auctions assess
commission on a per-head basis, others on a percent-
age of the proceeds, and some on a combination of the
two. Other costs which must be considered by pro-
ducers are shrinkage and transportation which are in-
curred prior to the livestock entering the auction ring.
Forward Contracts
Forward Pricing
It is possible to obtain a forward price contract
for some types of livestock. Many livestock buyers
will contract to purchase a given amount of these com-
modities at a set price for delivery in a later month.
Contract sales remove price uncertainty but do not al-
low selling at a higher price if prices rise later in the
year.
Even with a contract there are risks of non-per-
formance or misinterpretation. These risks can be mini-
mized by carefully reviewing terms of the contract and
credibility of the buyer. Both buyer and seller need to
understand all terms of the contract before signing the
Often times the production process takes so much
effort that the marketing of the product becomes just a
sale after weaning or coming off pasture. As such,
producers often seem to get in a marketing rut. It isnt
until market prices drop that serious consideration is
given to marketing alternatives. This article, and the
next, will discuss the alternatives you can use right
now to manage your price risk and perhaps meet your
goals. The purpose of this article is to present some of
the marketing alternatives available to you right now,
and the next article entitled, Comparing Your Mar-
keting Opportunities discusses the advantages and
disadvantages of these alternatives.
Alternatives
Price at Delivery - Auction
Price at delivery is a primary marketing method
used by producers selling livestock. This type of mar-
ket alternative basically just requires the producer de-
liver the product to the market location whenever the
producer is ready to sell. The timing of the marketing
decision is often linked to production operations such
as harvest or weaning. In general, the producer deliv-
ers whatever quantity of product he/she wishes to sell
and accepts the price dictated by the market. The pro-
ducer usually has the option to accept or not accept
the price offered. However, if the offer is refused,
additional costs may be incurred due to transportation,
interest, etc. while exploring other alternatives or wait-
Marketing Alternatives That Can Be Considered
In Your Business Plan Today
By
Chris Bastian, University of Wyoming
Managing for
Todays Cattle Market
and Beyond
2
agreement. If you still have questions, it might be wise
to have an attorney familiar with contract law review
the agreement.
Cattle Contracts
Direct sales of beef cattle can reduce transporta-
tion and handling problems, actual shrink (usually there
is some pencil shrink though), and commission and
yardage costs compared to selling cattle at an auction.
In general, the buyer contracts for a certain quantity
of cattle, weighing within a certain range, to be taken
possession of at some future point in time for an agreed
upon price.
While the majority of cattle buyers are honest,
previous experience indicates that some take advan-
tage of unsuspecting sellers. Most problems involve
non-payment for livestock. Many times the cattle are
taken from the state of origin, making it difficult to
repossess or to receive payment. In the past a verbal
commitment and a handshake from a buyer you knew
were sufficient. However, todays livestock seller
should exercise more caution to ensure an equitable
transaction is accomplished. Each year situations de-
velop where some livestock producers are faced with
non-payment when selling their cattle direct to buy-
ers. The risk of non-payment, non-performance, or
loss of title when selling direct to livestock buyers can
be minimized by following a few guidelines.
It is a good practice to check out the legitimacy
of the buyer. First determine the license status of the
buyer or the dealer the buyer works for. Buyers who
are employed by brokers and dealers generally buy
under the dealers license and must be individually
bondable. Dealers or brokers applying for licensure
must identify all buyers and must provide evidence
that each buyer has been registered with a bonding
agency. Each buyer is issued a buying a card. Sellers
should inspect the buying card and note the number
and expiration date if there is any question the legiti-
macy of a buyer who claims to be operating under the
authority of someone elses license.
To receive a license, the dealer must meet cer-
tain criteria and post a performance bond. Individual
states will have different requirements as to the type
and amount of state department bonds. A $10,000 bond
through the Packers and Stockyards Administration is
usually also acceptable. The relatively low bond does
not provide much protection to the seller, but it does
ensure some minimal financial standards have been
met. These rules and regulations vary from state to
state, and can be determined for your state through
your state Department of Agriculture. You might also
ask for some financial references such as the buyers
banker. The financial reference can verify if the buyer
does in fact have an account with the institution, and
perhaps the reference might offer an opinion as to the
legitimacy of the buyer as a business person.
The bill of sale can be useful to protect the sellers
title to the livestock until payment is received. By
retaining the bill of sale, the seller retains title to the
livestock. Buyers have an understandable desire to
receive the bill of sale at delivery because it is proof
of purchase. It is possible to modify the bill of sale to
include provisions to retain possession of title until
payment is made.
By designating the document as a bill of sale and
contract, it becomes more useful for both buyer and
seller since it summarizes not only the sale transac-
tion, but also the provisions of the sale. This can be
extremely useful in the event the seller must later re-
possess and prove ownership, origin, or title to the live-
stock, or must initiate litigation against the buyer. It
also is useful when establishing a claim on livestock
which have been resold one or more times after the
original sale.
Between states, the bill of sale requirements may
vary. You may want to check with your state authori-
ties concerning what information is and can be speci-
fied in the bill of sale.
Another consideration concerning direct sales of
livestock is method of payment. Currently, a wire
transfer is the payment method recommended by some
financial institutions. If the seller withholds title until
the transfer is confirmed, a wire transfer is virtually
foolproof and practically eliminates payment risk for
the seller. However, even the limited time lag may
hinder its usefulness. Other methods that have a rela-
tively low risk are cashiers check, certified check, or
a letter of credit. The letter of credit is especially use-
ful for recurring transactions. A cashiers check is good
for out-of-state or unfamiliar buyers, but is not conve-
nient for buyers. A certified check may not be conve-
nient for buyers either because it is usually pre-drawn
in a specific amount.
Other specifications or factors to be considered
are any weight, sex and quality standards specified by
the buyer. Usually the buyer has looked at your cattle
and has drawn conclusions concerning quality, but
since the cattle are to be delivered at some future point
in time some of the expectations concerning weight
and so on may need to be specified in the contract.
Also, the provisions for any price premiums or dis-
counts based on those specifications should be spelled
out in the contract. For example, what happens if the
cattle are expected to average 500 pounds upon weigh-
3
ing? If the cattle are heavier, the buyer may discount
the price. The price discount or slide should be speci-
fied in the contract.
Transportation and shrinkage costs must also be
considered when entering into a forward contract for
livestock. Where are the cattle to be weighed and
when? If they are to be weighed off your place, how
much will transportation and shrinkage cost you? Ad-
ditionally, a pencil shrink is often specified. What are
the weighing specifications? For example, if the buyer
asks for an overnight dry stand before weighing the
cattle plus a pencil shrink, the buyer is discounting
your cattle significantly through loss of payweight.
Additionally, be sure who accepts liability concerning
death loss on the truck. Normally it should be the truck-
ing firm, but if there is any doubt, specify it in the
contract.
These considerations can minimize potential
risks livestock producers face concerning non-pay-
ment, non-performance, loss of title and unfair mar-
keting costs when selling direct to livestock buyers.
Be sure to verify the qualifications and financial ad-
equacy of prospective buyers, insist on acceptable pay-
ment methods, retain title to the livestock until final
payment has cleared the financial institution, and dont
accept unfair practices which dock your payweight
heavily.
Video Auctions
Video auctions have gained wider acceptance as
a method for marketing cattle. This method entails
producing a videotape of the animals being sold. Then,
after buyers have received written description of the
cattle, an auction is held. The sale is conducted with
buyers assembled in a room looking at TV monitors
and/or beamed by satellite to other buyers who bid by
telephone. Completed sales become cash forward con-
tracts since all cattle are sold for future delivery.
Detailed Description of Video Cattle Auction
The following discussion comes from Current
and New Beef Marketing Technology (Electronic)
(reference in the appendix).
For illustrative purposes this section will use the
Superior Livestock Auction. this does not endorse this
auction, but uses it as an example of how a video auc-
tion works and its requirements. These will vary some
among auctions. Video auction cattle presentations
consist of two components the video or visual com-
ponent and the sale catalog or written component. A
$2.00/head videotaping fee is included in the sale com-
mission unless the seller rejects the bid, in which case
the seller forfeits the taping fee. The taping is done by
one of Superior Livestock Auctionss (SLA) regional
representatives. Thus, the integrity of the video auc-
tion is heavily dependent on the integrity of its regional
representatives. Sales catalog descriptions are prepared
by the video auction company and the seller when the
cattle are videotaped.
Videotapes of about two minutes in duration are
shown while an auctioneer solicits bids. Buyers must
register in advance of the sale and undergo a credit
check in order to participate. Buyers may bid either in
person or by telephone from any location where the
satellite transmission can be received.
The video auction representative oversees deliv-
ery. Although the video auction representative is re-
sponsible for ensuring contract compliance by both
buyer and seller, buyers are permitted to be present at
delivery.
Each video auction has its own set of terms. A buyer
must register with the Auction prior to the sale, and be
issued a buyers number. Only qualified, pre-regis-
tered buyers with issued numbers are allowed to bid
in the sale ring.
Hedging with Futures
When a producer plans to sell a commodity, he/
she can use a short hedge to lock in a price and protect
against price decreases. It is important to remember
that if you plan to sell the commodity in the future,
you need to sell in the futures market when you take
your initial position. Otherwise you will not be lock-
ing in a future sale price for your commodity. A pro-
ducer can also use the futures market to lock in a fu-
ture purchase price of a commodity such as feed. In
this case, you plan to buy the commodity in the future,
and thus, you need to buy a futures contract when you
take your initial position. This is called a long hedge.
Another article entitled Futures Markets - Basic dis-
cusses using the futures market in more detail in this
publication, but it is important to remember this is an
important forward pricing tool which can be used to
lock in a future sale price or a future purchase price of
a commodity.
Using Agricultural Options
An option contract is simply an agreement which
allows the purchaser the opportunity, but not the obli-
gation, to buy or sell a futures contract at a specified
price. Since buyers of options have the option but
not the obligation to exercise their right to buy or
sell futures contracts at a specified price (referred to
as the strike price), they are called options.
An option is like an insurance policy. Just as a
producer may purchase the right from an insurance
agency to collect on a policy in case of a disaster, he
or she may purchase the right to buy or sell a com-
4
modity (through a futures contract) at the strike price
in case of a disastrous price move. As in the case of an
insurance policy against fire, the producer must pay a
premium to insure against commodity price declines
or increases. A producer could collect on the option if
the price moves in an unfavorable direction.
There are two types of options. They are the
PUT option and the CALL option. The put op-
tion is purchased by the producer who wants to insure
against price declines. The put option insures a mini-
mum selling price for the option buyer who has a com-
modity to sell. The put option gives the option buyer
the right to sell a particular futures contract at a speci-
fied price. The call option gives the option buyer the
right to buy a particular futures contract at a specified
price. The options then can be used to set a minimum
selling price (put) or maximum purchase price (call)
for a commodity at future point in time. How this tool
can be used will be explained in more detail in an ar-
ticle entitled Commodity Options As Price Insurance
For Cattlemen in this series.
The advantage of using a put option is that you
can protect yourself against falling prices, but you are
not locked into a price if prices rise. That is because
you have the option, but not the obligation to exercise
the option into a futures position. The advantage of
using a call option is that you can protect yourself
against rising prices when purchasing a commodity,
but you are not locked into a price if prices fall. For
this right but not obligation to be in the futures mar-
ket, you pay what is called a premium.
All of these alternatives are available to you to-
day. They can be used to help you manage your price
risk and perhaps improve your chances of meeting your
business goals. In comparing your marketing oppor-
tunities it is important to consider transportation costs,
shrink, market charges or fees, marketing services
available, methods of selling available, competitive-
ness of the market you are considering, price risk and
marketing or pricing goals. If you take the time to get
out of a marketing rut, you can compare these alterna-
tives and shop for good pricing opportunities rather
than waiting until weaning or coming off pasture to
make a sale. Just take a little time to develop a mar-
keting plan.
References
Bahn, H.M., R. Brownson and C.H. Rust. Guide-
lines for Direct Sale of Feeder Cattle. GPE-4115.
Great Plains Beef Cattle Handbook.
Bastian, Chris, and John P. Hewlett. WIRE: Market-
ing and Risk Management Handbook. Department of
Agricultural Economics, University of Wyoming.
Laramie. 1994.
Futrell, G.A., and R.N. Wisner. Marketing For Farm-
ers. 2nd. ed. Doane Information Services. St. Louis,
Missouri. 1987.
Guyer, P.Q. Contract Feeding of Growing Calves.
GPE-4004. Great Plains Beef Cattle Handbook.
Kay, Ronald D., and William M. Edwards. Farm Man-
agement. 3rd. ed. McGraw-Hill, Inc. N.Y. 1994.
Purcell, W.D. Agricultural Futures and Options: Prin-
ciples and Strategies. Macmillan Publishing Co. N.Y.
1991.
Rust, C.H., and D. Bailey. Current and New Beef
Marketing Technology (Electronic). GPE-4110.
Great Plains Beef Cattle Handbook.